PRA Publishes CP13/18 on Equity Release Mortgages Under Solvency II
PRA published the consultation paper (CP13/18) that sets out additional PRA expectations from firms investing in equity release mortgage (ERM) portfolios, as set out in Chapter 3 of the supervisory statement SS3/17. The PRA expectations from firms investing in illiquid, unrated assets within their Solvency II matching adjustment portfolios have been set out in SS3/17. PRA also published a letter from David Rule, its Executive Director of Insurance Supervision, which highlights certain key points related to the consultation. The consultation closes on September 30, 2018 and its proposed implementation date is December 31, 2018.
CP13/18 proposes to update SS3/17, with the aim to provide greater clarity to firms on the expectations for how they should ensure that the matching adjustment claimed on restructured ERMs is not overstated. The proposals aim to ensure that, where firms have invested in ERMs and have approval to use the matching adjustment or transitional measure on technical provisions, their technical provisions are not understated and that their Solvency II and ICAS balance sheets include appropriate allowance for the risks to which they are (directly or indirectly) exposed. CP13/18 is relevant to insurance and reinsurance companies holding ERMs. The proposals included in CP13/18 are as follows:
- Firms using the approach and minimum calibration proposed would meet the PRA expectations for assessing the allowance for no negative equity guarantee (NNEG) risk for the Effective Value Test (EVT).
- Firms holding ERMs should include an explicit allowance for other risks within the EVT.
- Where firms holding restructured ERMs in their matching adjustment portfolio cannot meet the EVT, this suggests that they may be taking an inappropriately large matching adjustment benefit. Thus, they will need to review their current approach and consider making changes to the structure, valuation, or rating of restructured ERMs to ensure that they are able to calculate their matching adjustment benefit consistently with Solvency II requirements
- Firms holding ERMs that benefit from the transitional measure on technical provisions should adopt the same approach to an assessment of NNEG and other risks for their ICAS technical provision calculations as they do for Solvency II technical provision calculations for the purpose of calculating transitional measure on technical provisions to ensure consistency between the calculation bases
- Firms should consider whether they need to revise their internal models in response to any of the above changes
Related Links
Comment Due Date: September 30, 2018
Effective Date: December 31, 2018
Keywords: Europe, UK, Insurance, Solvency II, Equity Release Mortgage, CP13/18, SS3/17, Matching Adjustment, PRA
Featured Experts
Adam Koursaris
Asset and liability management expert; capable modeler; risk and capital specialist
Cassandra Hannibal
IFRS 17 subject matter expert; actuary; risk management and capital projection specialist
Jerome Ogrodzki
Insurance asset and liabilities modeling specialist; stochastic modeling expert
Previous Article
RBNZ Releases Results of the 2017 Stress Test of Major BanksRelated Articles
EBA Updates List of Validation Rules for Reporting by Banks
EBA issued a revised list of validation rules with respect to the implementing technical standards on supervisory reporting.
EBA Responds to EC Call for Advice to Strengthen AML/CFT Framework
EBA published its response to the call for advice of EC on ways to strengthen the EU legal framework on anti-money laundering and countering the financing of terrorism (AML/CFT).
NGFS Advocates Environmental Risk Analysis for Financial Sector
NGFS published a paper on the overview of environmental risk analysis by financial institutions and an occasional paper on the case studies on environmental risk analysis methodologies.
MAS Issues Guidelines to Promote Senior Management Accountability
MAS published the guidelines on individual accountability and conduct at financial institutions.
APRA Formalizes Capital Treatment and Reporting of COVID-19 Loans
APRA published final versions of the prudential standard APS 220 on credit quality and the reporting standard ARS 923.2 on repayment deferrals.
SRB Chair Discusses Path to Harmonized Liquidation Regime for Banks
SRB published two articles, with one article discussing the framework in place to safeguard financial stability amid crisis and the other article outlining the path to a harmonized and predictable liquidation regime.
FSB Workshop Discusses Preliminary Findings of Too-Big-To-Fail Reforms
FSB hosted a virtual workshop as part of the consultation process for its evaluation of the too-big-to-fail reforms.
ECB Updates List of Supervised Entities in EU in September 2020
ECB updated the list of supervised entities in EU, with the number of significant supervised entities being 115.
OSFI Identifies Focus Areas to Strengthen Third-Party Risk Management
OSFI published the key findings of a study on third-party risk management.
FSB Extends Implementation Timeline for Framework on SFTs
FSB is extending the implementation timeline, by one year, for the minimum haircut standards for non-centrally cleared securities financing transactions or SFTs.
